compounded monthly a How much should you pay for the investment b What will be

Compounded monthly a how much should you pay for the

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compounded monthly . a. How much should you pay for the investment? b. What will be the total sum of cash you will receive over the next eight years? c. What do we call the difference between (a) and (b)? a) Find the present value of 96 monthly payments, of $750 (end-of-month) discounted at an interest rate of 15 percent compounded monthly. Present Value =PV (n, i, PMT, FV) =PV (96 periods, 15% 12, $750, 0) = $41,793 should be paid today b) The total sum of cash received over the next 8 years will be:
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2 | P a g e 8 years x 12 payments per year x $750 per month = $72,000 c) Total cash received by the investor $72,000 Initial price paid by the investor $41,793 Difference: Interest Earned $30,207 The difference represents the total interest earned by the investor on the initial investment of $41,793 if each $750 payment is discounted at 15 percent compounded monthly. 8. An investor can make an investment in a real estate development and receive an expected cash return of $45,000 at the end of six years. Based on a careful study of other investment alternatives, she believes that a 9 percent annual return compounded quarterly is a reasonable return to earn on this investment. How much should she pay for it today? Find the present value of $45,000 received at the end of 6 years, discounted at a 9% annual rate, compounded quarterly. Present Value =PV (n, i, PMT, FV) =PV (24 quarters, 9% 4, $0, $45,000) = $26,381 should be paid today Note that a quarterly interest factor is used in this problem because the investor indicates that an annual rate of 9% compounded quarterly is desired.
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  • Fall '17
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